Peter Thiel Explains Why PayPal Paid Customers To Sign Up In The Early Days

Peter Thiel and Elon Musk,
back when they were running PayPal in 2000.AP

Back in the dreamy pre-cash days of 1999, PayPal was still mainly
a product that let you send money from one PalmPilot to another —
an idea so heinous that it earned a "top ten worst business idea of the year"
designation.

Accepting the fact that not enough people had PalmPilots,
then-CEO Peter Thiel and his pirate crew thought to use an
increasingly commonplace communications technology: email.

In his new book "Zero to One," Thiel says that while the
pay-via-email product was working well, the year-old startup
faced slow user growth and increasing expenses.

If PayPal was going to work, he says, it would need a "critical
mass" of 1 million users.

"Advertising was too ineffective to justify the cost," he says.
"Prospective deals with big banks kept falling through. So we
decided to pay people to sign up."

Thiel recalls the program going like this:

We gave new customers $10 for joining, and we gave them $10 more
every time they referred a friend. This got us hundreds of
thousands of new customers and an exponential growth
rate. Of
course, this customer acquisition strategy was unsustainable on
its own — when you pay people to be your customers, exponential
growth means an exponentially growing cost
structure.

Inviting those kinds of costs might sound crazy, but Thiel (and
history) show that the strategy was sane.

"Given a large user base," he says, "PayPal had a clear path to
profitability by taking a small fee on customers'
transactions."

The pay-the-customer scheme gave PayPal the userbase it needed.
Then, a well-timed round of financing in March 2000 — just before
the dot-com bubble popped — gave the company the cushion it
needed to absorb the financial hit that all those costs
invited.